Scope of Islamic banking on small and medium enterprises(SME’s)

Submitted by AISHA  & UJALA 

Email: emaangemni@yahoo.com

Introduction:

A business having not more than 50 employees and annual sales are up to Rs. 150 million is termed as small enterprise whereas, a business with 51-250. employees and.productive assets.worth Rs30-100.million, a.service provider.with 51-250.workers and.productive assets.of Rs20-50.million and.a trader.with 21-50. employees and.productive assets. of Rs20-50.million is. called medium.enterprise.

 “An Islamic. bank is. a financial.institution whose.status, rules.and procedures. expressly state. commitment to.the principle of.Islamic Shariah. and to.the banning. of the.receipt and.payment of.interest on.any of its.operations.” 

(General secretarial OIC)

The objective of Islamic banking is to promote and follow the laws of Quran and Sunnah. As Islamic banks are working along with conventional banks that’s why some of their services are similar to conventional banks but they are providing better and more reliable services as compared to conventional banks

SME’s provided by the Islamic banks are might be considered similar to the conventional banks but the services provided by the Islamic banks are more reliable and according to the rules of the Islam and that’s why people are more inclined towards Islamic banks and their services.

Islamic Banking is also the part of the financial sector and they also try to get profit but they are more concerned to use the funds for the legal purposes only. That is why most of the people invest their money in Islamic financial sector because the risk of misuse of the funds is very less. It also increase the economic activity and close the door for paying the 

Non- performing loans by using fresh incoming finance. SME is a financial sector where Islamic banking can work very efficiently and can help to create employment by increasing the assets and hence directly helps to alleviate poverty from the society. SME sector is the one that help to increase the GDP of the country by the direct or indirect ways and the economy of many countries highly depend on SME’s but in Pakistan it has only a minor share.

Out of Pakistan’s 3.2 million enterprises 95% are those who possess 99 employees in private industrial sector and employ about 78% of non agriculture labor force. SME contributes 25% export of manufacturing goods and 30% to 40% of GDP is the outcome of business efforts of SMEs.

The goals of Islamic banks are different but they are always ethical, moral and business oriented.

Increase in the services of he islamic banks can help us to prompt and flourish the SME sector more in Pakistan.

Problem statement: 

According to economic survey 2014-15 contribution of industrial sector in GDP is 20.3%. The contribution of manufacturing sector in industrial sector is 65.4% and 13.3% in GDP. The large scale registered manufacturing units show 10.62% growth. But for the prosperity of the masses we need to flourish the SME sector by improving the banking services in Pakistan.

Objective:

The objective of our study is to find out that if the Islamic SME’s provided by Islamic banks are improved and increased then there would be seen a clear change in the poverty alleviation and by direct or indirect ways we will also see a positive trend in the GDP of the country.

Methodology 

A majority of banks are not well equipped to deal with the requirements and potential of the SME sector, and that cause unemployment and increase poverty. In order to meet this demand, banks, including Islamic banks would have to build capacity in different areas. We have taken the financial statements of all Islamic banks that provide Islamic SME’s and the share of their total finance in providing Islamic SME’s. Thus, we find out that if there would be an increase in the Islamic SME’s services and finance than it will help to provide employment and will directly or indirectly help to improve the economy and GDP of the country.

Sr. no	Banks	Products	Number of branches	Balance sheet	Islamic financing and related assets – net
1.	Faysal bank	Diminishing Musharakh, Murabaha, Salam, Ijrah	276 branches including 62 Islamic branches	Assets= 450,549,803 Liabilities= 422,352,081 Net assets= 28,197,722	16,921,221
2.	AL Meezan bank	Salam, Tijarah, Musharakah, Murabaha, Musawarmah, diminishing Musharakh, ijarah	Near about 500 branches	Assets= 531,849,934 Liabilities= 505,502,824 Net assets= 26,347,110	207,568,823
3.	Al Baraka bank	Diminishing musharka, ijarah, purchase plan for machinery and vehicles, istisnah, salam, murabaha	Near about 166 branches working in Pakistan	Assets=86,932,510 Liabilities=80,659,273 Net assets=6,273,237	47,644,690
4.	Dubai Islamic bank	Murabaha, import marabaha, istisna cum wakala, shirkat ul melk cum ijarah, diminishing musharka	125 branches are working in Pakistan	Assets=157,093,185 Liabilities=149,117,515 Net assets=7,975,667	104,953,637
5.	Bank Islami	Ijarah, diminishing musharka, karobar finance, istisnah finance, murabaha finance, islamic export refinance, export bill purchase, discounting under salam arrangements.	317 branches are working in Pakistan	Assets=177,029,911 Liabilities=165,891,384 Net assets=11,138,527	57,598,654
6.	Standard Chartered	Saadiq letter of credit (LC), Saadiq import finance, saadiq shipping grantee, saadiq letter of credit confirmation, saadiq export bill for collection, saadiq export bill finance, saadiq guarantees, saadiq short term finance, saadiq term finance, saadiq foreign exchange spot and forward.	101 branches in Pakistan	Assets=447,347,791 Liabilities=385,397,336 Net assets=61,950,455
7.	Askari bank	Mudarabah,wakala, qard, ijrah, istisna, salam, musharqa.	424 branches and 78 Islamic banks branches	Assets=535,867 Liabilities=509,014 Net assets=26,853	29,168,564
8.	UBL amin	UBL sahulat, UBL karobar loan, UBL cotton ginning loan, UBL rice husking loan	69 branches	Assets=1,400,651 Liabilities=1,258,516 Net assets=142,135	56,299
9.	HBL Islamic bank	HBL mudarbah, Diminishing musharka, HBL ijrah, HBL istisna, Bai salam	423 branches	Assets=640,023,814 Liabilities=601,832,280 Net assets=38,191,534	11,980,951
	MCB Islamic bank	Musharka, diminishing musharka, ijrah, Murabaha	1200+ branches	Assets=1,016,630 Liabilities=878,829 Net assets=137,800	10,124,699
11.	Bank of Khyber	Ijarah,murabaha, iajrah wal iqtina	130 branches	Assets= 155,158,733 Liabilities= 139,241,157 Net assets= 15,917,576	10,392,364
12.	Soneri bank	Ijrah, mudarabah, diminishing musharka,salam	226 branches	Assets= 253,342 Liabilities= 235,150 Net assets= 18,192	3,644,898
13.	Bank Al Falah	Business loan, al falah merchant loan, alfalah karobar, mudarabah, wadiha, musharka, murabah,ijarah	653 branches and 120 Islamic branches	Assets= 902,607 Liabilities= 849,254 Net assets= 53,353	42,056,149
14.	Dawood Islamic bank	Diminishing musharka, murabaha, ijrah-tul-ashkhas, ijarah, export mudarabah- cum- istisna and mudarabah, export murabaha-cum- mudarbh	A total of 50 branches	Assets= 11102110 Liabilities= 5,753,416 Net assets=5348694
15.	Burj Bank	Mudarah for local and imported goods, equipment ijrah financing, diminishing musharka financing, Islamic export refinancing scheme	16 Islamic branches 74 total branches	Assets= 32,736,074 Liabilities= 28,347,144 Net assets= 4,388,930	18,079,208
16.	NBP	Diminishing musharka, ijarah, murabaha	1403 braches all over Pakistan	Assets= 1 3,792,851 Liabilities= 1 3,089,399 Net assets= 7 03,452	1 ,029,202

Main observations and findings:

There are total 34 banks working in Pakistan. We took a sample of seventeen banks. All these banks provide Islamic SMEs but the amount of Islamic SME’s varying from bank to bank. In this table we also mention assets, liabilities and net assets due to limited balance sheet we only mention overall assets and liabilities instead of explaining contribution of each Islamic product in Islamic SME’s. Standard Chartered, Faysal bank and Meezan bank have ‘fairly good’ Islamic SME’s penetration, because these banks are providing most of the products.

There is considerable potential for Islamic banking products in the SME sector, as many of these companies, especially due to religious trends of people working in rural areas.

Solution and recommendation

1. Strategy and Segmentation 

There should be proper segmentation in the Islamic banks. Goals should be given to each segment and such type of strategy should be made that helps each segment to understand the market, business opportunity, and targeted area and then make optimal operating model and provide services according to the needs and requirements of the people in the targeted area. There should be a awareness institution in the banks also that guide their customers and also help them to chose the best option for their SME’s. 

2. Products and Services Borrowing solutions: 

Islamic banks may increase the amount of product and service by offering non-borrowing services such as cash management, payroll management, payments, collections, and trade finance solutions. Internet banking, mobile banking and services of debt and credit should also be included in the Islamic SME’s 

3. Sales and Delivery Introduction of new Islamic SME banking models: 

Islamic banks should use new SME banking models to target SMEs. The use of mobile banking (such as United Bank’s Omni facility) will help to increase the financial enclosure on less cost.

4. Advisory services: 

 All Islamic banks should focus on providing the advisory services to their customers. As SME’s is a bit new financial sector in Pakistan therefore people are not well aware of it. Thus all banks should focus on providing the advisory services regarding finance, management, business skills, future skills, financial modeling, and forecasting. This knowledge will help the customer to chose the best SME for him and these advisory services will also help to grow the business and earn profit from it.

5. Organization and Systems Better training for SME professionals:

There is always a shortage of knowledgeable about Shariah-compliant products. The reason is less investment of time and money on the training of the staff. To reduce the problem the management should focus on the training of the employee according to the demand of the market so the penetration in market would become easier for them

6. Streamline loan application processes for SMEs: 

SMEs face difficulty for loans due to large amount of documents required for the approval process. Sometimes these processes exceed a time period of one month. Therefore, to minimize this hurdle banks should seek technical assistance.

7. Institute a tailored Research Agenda:

Banks should focus on a tailored research agenda to support and assist SME support.

The best and qualified researchers will help to analysis the policy and agenda in multiple ways and dimensions hence, providing a better understanding for the other employees and also the best and most feasible solution and procedure for improving the services and increasing customer’s satisfactions. Their deeper knowledge will help to improve the process and also to reduce the poverty by increasing the chances of employments of the people in the society.